A New Pro­fes­sion

The bank­ruptcy law of­fers im­mense op­por­tu­ni­ties for in­sol­vency pro­fes­sion­als, but they are tread­ing with cau­tion.

Business Today - - FRONT PAGE - By DI­PAK MON­DAL

Vishal Rai and Sachin Sapra, part­ners in com­pany sec­re­tary firm RSJ As­so­ci­ates, were among the first few to reg­is­ter them­selves as in­sol­vency pro­fes­sion­als (IPS). As com­pli­ance experts, their foray into the space of IPs is a cal­cu­lated “risk”. They will have to come out of their com­fort zone and dive into a pro­fes­sion that may re­quire them to ac­quire new sets of skills and un­learn many things. IPs, af­ter all, will be gov­erned by a new set of laws which are a sharp de­par­ture from the ex­ist­ing pro­vi­sions on bank­ruptcy and debt re­cov­ery. Be­sides, both Sachin and Vishal have never worked on any­thing close to re­solv­ing is­sues of stressed as­sets or debt re­cov­ery.

They are aware of these “short­com­ings” and are, there­fore, tread­ing with cau­tion. Vishal says they have al­ready been ap­proached by a cor­po­rate debtor to ini­ti­ate the bank­ruptcy process, but they are non­com­mit­tal as they found many prob­lems with that case. His part­ner Sachin says they would need to build a team – since they are com­pli­ance experts, they would need a team of pro­fes­sion­als with ex­per­tise in fi­nance and law – be­fore they start ac­cept­ing cases.

“The chal­lenge for the IP is to man­age the com­pany as a go­ing con­cern with­out di­min­ish­ing its value and come up with a res­o­lu­tion plan within 180 days”

“Tak­ing the as­sign­ment is easy, but we have to be very care­ful with im­ple­men­ta­tion. The re­spon­si­bil­ity of the IPs would be enor­mous. Once the ap­pli­ca­tion has been filed, and the board has been sus­pended, the IP has to take over the com­pany and run it like a go­ing con­cern and at the same time pre­pare a res­o­lu­tion plan, all within a tight sched­ule. This can only be done with a team of experts,” says Sachin.

THE NEW BEAST IN TOWN

The new In­sol­vency and Bank­ruptcy Code, 2016 has thrown open op­por­tu­ni­ties for a new set of pro­fes­sion­als, whose pri­mary role would be to take over the man­age­ment of a cor­po­rate debtor against which a bank­ruptcy ap­pli­ca­tion has been moved, run it like a go­ing con­cern and pre­pare a res­o­lu­tion plan within the stip­u­lated 180 days. A res­o­lu­tion plan is nec­es­sar­ily a re­vival plan for the bor­rower so that it can ser­vice its li­a­bil­i­ties in fu­ture. Other roles as­signed to

in­sol­vency pro­fes­sion­als (in­terim IPs) include ac­cep­tance of cred­i­tors claims, ver­i­fi­ca­tion of those claims and as­cer­tain­ing the as­sets and li­a­bil­i­ties of the de­fault­ing bor­rower. The ten­ure of the in­terim IP is for 30 days.

These are early days for IPs and no­body knows what fate they could meet in the fu­ture. Will they be as ef­fec­tive as touted, or poor im­ple­men­ta­tion would re­sult in this law fac­ing the same fate as the pre­vi­ous ones? The bank­ruptcy law was en­acted in May last year and the early set of rules for cor­po­rate in­sol­vency be­gan to get no­ti­fied only af­ter Oc­to­ber. The ap­pli­ca­tions for in­sol­vency cases started to be filed from De­cem­ber 1, 2016. So far, around 20 ap­pli­ca­tions have been ad­mit­ted by the Na­tional Com­pany Law Tri­bunal (NCLT), the ad­ju­di­cat­ing au­thor­ity for cor­po­rate in­sol­vency cases. The law for per­sonal bank­ruptcy cases is yet to be framed.

De­spite the un­cer­tain­ties, over 1,000 in­di­vid­u­als (84 IPs with reg­u­lar reg­is­tra­tion and 977 with a limited-pe­riod reg­is­tra­tion that lasts for six months) across dif­fer­ent pro­fes­sions – char­tered ac­coun­tants, cost ac­coun­tants, com­pany sec­re­taries and lawyers – have reg­is­tered them­selves as in­sol­vency pro­fes­sion­als. For limited-pe­riod reg­is­tra­tion, char­tered ac­coun­tants, com­pany sec­re­taries, cost ac­coun­tants and ad­vo­cates with 15 years of prac­tice were el­i­gi­ble. For reg­u­lar reg­is­tra­tion, char­tered ac­coun­tants, com­pany sec­re­taries, cost ac­coun­tants and ad­vo­cates with 10 years of ex­pe­ri­ence and grad­u­ates with 15 years of man­age­rial ex­pe­ri­ence are el­i­gi­ble.

While the in­sol­vency reg­u­la­tor – the In­sol­vency and Bank­ruptcy Board of In­dia (IBBI) – has stopped reg­is­tra­tion of IPs on an ad hoc ba­sis, those seek­ing reg­u­lar reg­is­tra­tion have to ap­pear in a test con­ducted by the board across

“We may face sit­u­a­tions where the pro­moter of the debtor would try to stop us from en­ter­ing the premise, for­get about giv­ing us ac­cess to all doc­u­ments and books of ac­counts”

the coun­try. The board is also plan­ning a na­tional-level ex­am­i­na­tion for those who solely want to pur­sue the ca­reer as an IP. “We are also work­ing on the Na­tional In­sol­vency Ex­am­i­na­tion for those who wish to pur­sue a ca­reer in in­sol­vency. We, how­ever, don’t have full clar­ity about the struc­ture of the course and the ex­am­i­na­tion and how this will be de­liv­ered,” says M.S. Sahoo, Chair­man, IBBI.

OP­POR­TU­NI­TIES

Go­ing by the early num­bers of in­di­vid­u­als who have reg­is­tered them­selves as IPs, it looks like they see im­mense op­por­tu­nity in the new pro­fes­sion. That’s why de­spite many fore­see­able challenges, peo­ple are reg­is­ter­ing them­selves as IPs. Some num­bers would help un­der­stand the kind of op­por­tu­ni­ties IPs see in the fu­ture. As per the Eco­nomic Sur­vey 2016/ 17, the In­dian fi­nan­cial sec­tor has stressed as­sets worth `12 lakh crore, which is 17 per cent of the to­tal loan out­stand­ing, and 8.4 per cent of the GDP. Many of these cases would land up un­der the new bank­ruptcy regime.

There are about 700 BIFR and 15,000 DRT cases (re­lated to cor­po­rates only), in ad­di­tion to 5,200 wind­ing up and amal­ga­ma­tion cases pend­ing be­fore high courts, that are be­ing trans­ferred to NCLT. Ac­cord­ing to a re­port by AS­SOCHAM and Crisil, the new bank­ruptcy law can po­ten­tially re­lease about `25,000 crore cap­i­tal cur­rently locked up in non-per­form­ing as­sets (NPAS) over the next 4-5 years. “There is am­ple scope for IPs con­sid­er­ing the data on pend­ing cases and the num­ber of pro­fes­sion­als avail­able as on date,” says Shyam Agrawal, Pres­i­dent, In­sti­tute of Com­pany Sec­re­taries of In­dia (ICSI), which has reg­is­tered it­self as an IP agency – it grants reg­is­tra­tion to IPs, lays down stan­dards for them and mon­i­tors their per­for­mance.

San­deep K. Gupta, a char­tered ac­coun­tant by qual­i­fi­ca­tion and an IP, elab­o­rates fur­ther. “The NPA size is `8-9 lakh crore, which is huge in it­self. And the in­sol­vency law doesn’t talk only about es­tab­lished de­fault­ers like in the case of NPAs, it talks about any de­faulter. Be­sides, the law also talks about de­fault by part­ner­ship firms and in­di­vid­ual de­faults. There­fore, the op­por­tu­nity for in­sol­vency pro­fes­sion­als is enor­mous,” says Gupta, who has over 20 years of ex­pe­ri­ence in deal­ing with stressed com­pa­nies and stressed as­sets.

THE CHALLENGES

While there are op­por­tu­ni­ties galore for res­o­lu­tion pro­fes­sion­als, they are not with­out sig­nif­i­cant challenges. As the main pil­lar of the new law is time-bound res­o­lu­tion of bank­ruptcy cases, these pro­fes­sion­als have to ac­com­plish a very big feat within a strict time­line of 180 days. Sahoo of IBBI ex­plains: “The chal­lenge for the IP is to man­age the com­pany as a go­ing-con­cern with­out di­min­ish­ing its value, and come up with a res­o­lu­tion plan within 180 days.” He says that though the IPs have done re­struc­tur­ing, takeover, merg­ers and amal­ga­ma­tions, they have not done res­o­lu­tion un­der the new Code, which is unique in many ways.

Why is it unique? For the first time, any in­sol­vency law in the coun­try gives the han­dle (of the res­o­lu­tion plan) to the cred­i­tors, es­pe­cially the fi­nan­cial cred­i­tors. The IP would run the man­age­ment of the de­fault­ing debtor with the “guid­ance” of the cred­i­tors com­mit­tee. Be­sides, the res­o­lu­tion plan has to be ap­proved by 75 per cent of the fi­nan­cial cred­i­tors by size of their loans. The cred­i­tors, there­fore, would al­ways be mon­i­tor­ing the IPs. Also, tak­ing over a com­pany and run­ning it like a go­ing con­cern is eas­ier said than done. Imagine an IP with no prior ex­pe­ri­ence of work­ing with a steel com­pany may be roped in for a project in­volv­ing a debtor which is a steel man­u­fac­turer. How is he sup­posed to run a com­pany with­out un­der­stand­ing the busi­ness of the com­pany? He doesn’t have the lux­ury of time as well be­cause he has to also si­mul­ta­ne­ously work on a res­o­lu­tion plan, con­duct meet­ings of the cred­i­tors com­mit­tee as well as raise in­terim fi­nance for the com­pany.

How­ever, ac­cord­ing to Sahoo, IPs have been ad­e­quately em­pow­ered by the bank­ruptcy law. First, the com­mit­tee of cred­i­tors, who are gen­er­ally so­phis­ti­cated fund man­agers or bankers, is be­hind them for tak­ing de­ci­sions on ma­jor is­sues. Sec­ond, IPs are em­pow­ered to en­gage any pro­fes­sional they think nec­es­sary in ad­di­tion to the ex­ist­ing man­age­rial personnel who are at their dis­posal. But there are other prac­ti­cal is­sues. There is every chance that the man­age­ment and staff of the bor­rower against which the in­sol­vency pro­ceed­ing has been started does not co­op­er­ate with the IP and don’t pro­vide in­for­ma­tion and doc­u­ments nec­es­sary for run­ning the com­pany or pre­par­ing a res­o­lu­tion plan. Vishal Rai of RSJ

As­so­ci­ates says, “We may face sit­u­a­tions where the pro­moter of the debtor would try to stop us from en­ter­ing the premise, for­get about giv­ing us ac­cess to all doc­u­ments and books of ac­counts.” His part­ner Sachin Sapra says that though the Code stip­u­lates that if the debtor is not giv­ing ac­cess of the premise to IPs, they can go to court and seek help from lo­cal au­thor­i­ties. But it’s a time-con­sum­ing process and the res­o­lu­tion process is time-bound. Even if the IPs are allowed to en­ter the premise of the debtor, they would need the staff to help them in run­ning the com­pany as a go­ing con­cern. Not ev­ery­one in the staff may co­op­er­ate.

A com­pany may have thou­sands of fi­nan­cial trans­ac­tions. The chal­lenge for an IP would be to iden­tify the im­por­tant trans­ac­tions (which helps a com­pany run as a go­ing con­cern) and stop those in­im­i­cal to the in­ter­ests of the com­pany. Deven­dra Singh, a char­tered ac­coun­tant and one of the first few to re­ceive reg­u­lar reg­is­tra­tion as an IP, how­ever, says that the law re­quires the debtor to pro­vide all the nec­es­sary in­for­ma­tion re­quired by the IP in run­ning the com­pany. He says there are pe­nal pro­vi­sions (a max­i­mum jail term of five years and a penalty of up to `1 crore) for ac­tion against the pro­moter or staff of the de­fault­ing debtor if the IPs are not given ac­cess to nec­es­sary in­for­ma­tion. A tight dead­line of 180 days (ex­tend­able up to 270 days) re­mains the big­gest chal­lenge for IPs. Manoj Ku­mar, Part­ner & Head, M&A and Trans­ac­tions, Cor­po­rate Pro­fes­sion­als, an ad­vi­sory firm which of­fers cor­po­rate, le­gal and tax so­lu­tions, points out the kind of work an in­terim IP has to per­form within a short span of 30 days.

“He needs to make the pub­lic an­nounce­ment for invit­ing claims, col­late all the in­for­ma­tion, ap­point val­uers, re­ceive and col­late claims, de­ter­mine the fi­nan­cial po­si­tion of the debtor, pre­pare the in­for­ma­tion mem­o­ran­dum with de­sired de­tails and call the first meet­ing of the com­mit­tee of the cred­i­tors; all in a time- bound man­ner. There is an enor­mous task to per­form if the com­pany is big,” says Manoj Ku­mar. Imagine a com­pany which has im­mov­able prop­er­ties in four dif­fer­ent lo­ca­tions in the coun­try, points out Sachin Sapra of RSJ As­so­ci­ates. It would be dif­fi­cult for the res­o­lu­tion pro­fes­sional to take charge of these as­sets and value them within 30 days, as­serts Sapra.

TEAM WORK

Given the enor­mity of the task and tight sched­ules, IPs are look­ing to build their own team be­fore set­ting out to han­dle cases. Some of them are even look­ing to re­or­gan­ise them­selves as in­sol­vency pro­fes­sional en­ti­ties – the in­sti­tu­tional ver­sion of IPs – as they feel this is not a sin­gle per­son’s job. “We need all kinds of experts – fi­nan­cial, le­gal and com­pli­ance-re­lated – un­der us to be able to run a com­pany, as­cer­tain the value of as­sets and li­a­bil­i­ties of a com­pany and pre­pare a res­o­lu­tion plan ac­cept­able to 75 per cent of the fi­nan­cial cred­i­tors, all within the stip­u­lated time­line,” says Deven­dra Singh,

These are early days and IPs, de­spite be­ing aware of the op­por­tu­ni­ties the bank­ruptcy law has thrown open for them, are tread­ing cau­tiously know­ing pretty well the enor­mity of the task and the challenges ahead. ~

“Whether you use the ex­ist­ing man­age­rial skills of the staff of the cor­po­rate debtor or hire your own team, with­out a team an in­sol­vency pro­fes­sional can­not func­tion on its own. He would have to have a team”

M.S. Sahoo Chair­man, In­sol­vency and Bank­ruptcy Board of In­dia

Sachin Sapra (left) and Vishal Rai of RSJ As­so­ci­ates Vishal Rai Part­ner, RSJ As­so­ci­ates

Deven­dra Singh In­sol­vency pro­fes­sional

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